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Earned Income Tax Credit (EITC): "If You Make Less Than $40,000 Annually, Gov't May Owe You As Much As $4,000! Don't File? $12,000! Gov't Saved $9 Billion Re Non-Filings In '07" - John Hope Bryant
Earned Income
Tax Credit (EITC):
If You Make Less
Than $40,000
Annually, Gov’t
May Owe You As
Much As $4,000!
Don’t File?
$12,000! Gov’t
Saved $9 Billion
Re Non-Filings
In ‘07” -
John Hope Bryant,
Project Hope
CNN NEWSROOM
Obama's National Security Team
Aired November 30, 2008 - 17:00 ET
WHITFIELD: And some experts would say forget the layaway. If money is tight, maybe it means you don't want to spend any money on gifts this is holiday season.
John Hope Bryant is a personal finances expert joining us from Los Angeles.
Good to see you.
JOHN HOPE BRYANT, PERSONAL FINANCES EXPERT: Good to be with you.
WHITFIELD: And happy holiday weekend.
BRYANT: Thank you.
WHITFIELD: So what's your best advice? If money is tight -- a lot of folks facing foreclosure, jobs are disappearing by the minute. How did we approach this holiday season with a lot of pressure for people to spend money and buy?
BRYANT: Well, I believe in rainbows after storms. You cannot have a rainbow without a storm first.
WHITFIELD: What do you mean?
BRYANT: Maybe -- we'll start reassessing our values. Look, versus paying hundreds of dollars for tennis shoes or whatever else that your kid's going to throw away or put aside in a month, how about giving them one share of stock? That could cost you $20 or $40 in this marketplace. One stock certificate. Frame it. And give them a free course on financial literacy. Go on bankingarchive.org (ph) or operation.org or one of the other nonprofits that do it for free, and give them a course in financial literacy. Or give them him bank account, or her a bank account, and put $25 or $50 in it. And give them a course on financial literacy. Make it a teachable moment.
There are a lot of wonderful -- look, probably the only thing I'd suggest putting on a credit card is a computer because with that, you can do online banking. You can teach your kids financial literacy. You can empower yourself. So there are a lot of creative ways to add value this season.
WHITFIELD: So are you encouraging people to just swear off credit all together? And if do you have that extra cash, whether it's $20 or some kind of fee like that and open up an account for a young person, you know, you're thinking about the future, you're kind of paying forward.
BRYANT: Yeah, this is really a time to reset. We are -- our savings rate is abysmal. We need to get correct it. We'll living -- the whole word lives on debt so you can't get away from that. But there's responsible debt and irresponsible debt. The subprime mortgage crisis wasn't about all bad irresponsible debt. It was greed based and predatory based subprime loans that did all the damage. There's responsible subprime loans that actually lifted people out of poverty and gave people a chance for home ownership.
I think there's also, just beyond the holidays -- look, when this market bottoms -- and you'll know when you can put 20 percent down payment on a house and afford to rent out and it will pay the mortgage, we know we're at bottom. This will be an opportunity for people to become homeowners -- you know, police officer, firefighter, teachers, people who live in a big city will be able to buy a home for the first time.
So not all the news is bad news. Use it as an opportunity, as you say, to pay your future forward, reset your priorities, and spend time with your families versus shopping at a mall maybe.
WHITFIELD: And we're talking about the mortgage mess, too, in part this hour. If you're facing foreclosure, you're already in default, maybe you better think about -- forget about exchanging gifts all together. Just enjoy each other's company.
BRYANT: There's a gift you can give yourself, Fredricka.
WHITFIELD: What's that?
BRYANT: The earned income tax credit. If you make less than $40,000 a year, the federal government owes you as much as $4,000. And if you haven't filed at all, it's $12,000 in some cases. That's enough money to cure your mortgage, to pay down your credit cards, to put a down payment on a house, start a small business, send your kid to college. So they can call Operation Hope or any other nonprofit that serves their community to try it get the EITC for them. We gave $9 billion back to the federal government in '07 because we did not even know to file if it. That's a massive level of financial illiteracy.
WHITFIELD: Excellent advice. John Hope Bryant, thanks so much, personal finances expert.
And now I get it. An advocate for financial literacy as well, teaching young people, people of all ages...
BRYANT: And civil rights.
WHITFIELD: And civil rights too. He's teaching people of all ages how to be responsible about finances.
Appreciate it, thanks so much, John.
BRYANT: All right.
WHITFIELD: And of course, we continue to receive a lot of your e-mails about what to do in this mortgage crisis, financial crisis. What's some of the best advice that we can offer you to kind of navigate and save yourself and save your home? And safe house hunting, too. If you have a little bit of cash on the side, actually it could be like bargain hunting. We'll take you to a foreclosure auction where some people are actually cashing in.
(COMMERCIAL BREAK)
http://transcripts.cnn.com/TRANSCRIPTS/0811/30/cnr.02.html
http://www.irs.gov/individuals/article/0,,id=96406,00.html
It’s easier than ever to find out if you qualify for EITC
The Earned Income Tax Credit (EITC), sometimes called the Earned Income Credit (EIC), is a refundable federal income tax credit for low-income working individuals and families. Congress originally approved the tax credit legislation in 1975 in part to offset the burden of social security taxes and to provide an incentive to work. When the EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit.
To qualify, taxpayers must meet certain requirements and file a tax return, even if they did not earn enough money to be obligated to file a tax return.
The EITC has no effect on certain welfare benefits. In most cases, EITC payments will not be used to determine eligibility for Medicaid, Supplemental Security Income (SSI), food stamps, low-income housing or most Temporary Assistance for Needy Families (TANF) payments.
Will you qualify for EITC this year?
Find out if you are eligible for the Earned Income Tax Credit (EITC) by answering some questions and providing basic income information using the EITC Assistant. Available in English and Spanish. The 2007 EITC Assistant is now available.
Childless Workers
You do not have to have a child to qualify for EITC, however, you must meet certain rules. Find out more here.
Special Rules
Special rules apply for calculating earned income for members of the U.S. Armed Forces in combat zones, members of the clergy, hurricane victims, and those with disability retirement income.
EITC Information for
* Individuals
* Tax Professionals
* Employers
* Partners
Tools
* EITC Assistant
* Additional Publications and Tools
* EITC Thresholds, limitations and updates
* EITC Questions and Answers
* Advance EITC
Don’t overlook your state credit
If you qualify to claim EITC on your federal income tax return, you also may be eligible for a similar credit on your state or local income tax return. Twenty-two states, the District of Columbia, New York City, and Montgomery County, Maryland, offer their residents an earned income tax credit.
Click here for a list of states with EITC. Questions about eligibility or how to claim EITC on a state or local return should be directed to your state/local tax authorities.
Earned Income Tax Credit Certification Test
The IRS conducted a test for tax years 2003-2005 by asking a small number of Earned Income Tax Credit (EITC) claimants to verify that they met key eligibility requirements in order to claim their earned income tax credit.
IRS Reports on the Earned Income Tax Credit
* EITC Statistics for Tax Years 1997-2006, Number and Amount of Claims
* IRS Earned Income Tax Credit (EITC) Initiative Report on Fiscal Year 2005 Tests
* IRS Earned Income Tax Credit Initiative Final Report to Congress October 2005
* Compliance Estimates for Earned Income Tax Credit Claimed on 1999 Returns
* EITC Program Effectiveness and Management, August 8, 2003
* EITC Subsequent Year Tracking Project Report (TY 1997-1999)
Missing Children
The IRS is partnering with the National Center for Missing & Exploited Children (NCMEC) to help search for missing children. For more information:
* Visit the NCMEC website.
* Call NCMEC at 1-800-843-5678
http://www.irs.gov/individuals/article/0,,id=96466,00.html
Earned Income Tax Credit (EITC) Questions and Answers
* What is the Earned Income Tax Credit (EITC)?
* Who can claim the credit?
* What if I was denied the EITC last year?
* Who is a qualifying child?
* Who is an eligible foster child?
* What is Earned Income?
* How do I figure my credit?
* How Can I Get EITC in My Paycheck?
* What if I am prohibited from claiming the EITC for a period of years?
* Where can I get more information?
Q1. What is the Earned Income Tax Credit (EITC)?
A1. The earned income credit (EITC) is a tax credit for certain people who work and have low wages. A tax credit usually means more money in your pocket. It reduces the amount of tax you owe. The EITC may also give you a refund.
Return to EITC Questions and Answers
Q2. Who can claim the credit?
A2. To claim the EITC on your tax return, you must meet all of the following rules:
* Must have a valid Social Security Number
* You must have earned income from employment or from self-employment.
* Your filing status cannot be married, filing separately.
* You must be a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen or resident alien and filing a joint return.
* You cannot be a qualifying child of another person.
* If you do not have a qualifying child, you must:
o be age 25 but under 65 at the end of the year,
o live in the United States for more than half the year, and
o not qualify as a dependent of another person
* Cannot file Form 2555 or 2555-EZ (related to foreign earned income)
* You must meet these EITC Thresholds and Limitations
Return to EITC Questions and Answers
Q3. What if I was denied the EITC last year?
A3. If your EITC for any year after 1996 was denied or reduced for any reason other than a math or clerical error, you must attach a completed Form 8862, Information to Claim Earned Income Credit After Disallowance, to your next tax return to claim the EITC. You must also qualify to claim the EIC by meeting all the rules described in Publication 596.
However, do not file Form 8862 if either (1) or (2) below is true.
1. After your EITC was reduced or disallowed in the earlier year:
* You filed Form 8862 (or other documents) and your EITC was then allowed, and
* Your EITC has not been reduced or disallowed again for any reason other than a math or clerical error.
2. You are taking the EITC without a qualifying child and the only reason your EITC was reduced or disallowed in the earlier year was because the IRS determined that a child listed on Schedule EITC was not your qualifying child.
Also, do not file Form 8862 or take the EITC for:
* 2 years after there was a final determination that your EITC was reduced or disallowed due to reckless or intentional disregard of the EITC rules, or
* 10 years after there was a final determination that your EITC was reduced or disallowed due to fraud.
Return to EITC Questions and Answers
Q4. Who is a qualifying child?
A4. Your child is a qualifying child if your child meets three tests. The three tests are:
1. Relationship
2. Age
3. Residency
Relationship
To be your qualifying child, a child must be your:
* Son, daughter, stepchild, eligible foster child, or a descendant (for example, your grandchild) of any of them, or
* Brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them (for example, your niece or nephew).
Definitions to clarify the relationship test.
Adopted child. An adopted child is always treated as your own child. The term "adopted child" includes a child who was lawfully placed with you for legal adoption.
Eligible Foster Child. A person is your eligible foster child if the child is placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction.
Age
Your child must be:
1. Under age 19 at the end of the year,
2. A full-time student under age 24 at the end of the year, or
3. Permanently and totally disabled at any time during the year, regardless of age.
Residency Test
Your child must have lived with you in the United States for more than half of the year.
See Publications 596 and 501 for more details
Review our Frequently Asked Question regarding EITC Qualifying Child Rules
Return to EITC Questions and Answers
Q5. Who is an eligible foster child?
A5. An eligible foster child is an individual who is placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction.
Return to EITC Questions and Answers
Q6. What is Earned Income?
A6. Earned income includes all the taxable income and wages you get from working.
There are two ways to get earned income:
1. You work for someone who pays you, or;
2. You work in a business you own.
Taxable earned income includes:
* Wages, salaries, and tips;
* Union strike benefits;
* Long-term disability benefits received prior to minimum retirement age;
* Net earnings from self-employment.
Combat Pay
Nontaxable combat pay election. You can elect to have your nontaxable combat pay included in earned income for the earned income credit. The amount of your nontaxable combat pay should be shown on your Form W-2, in box 12, with code Q.
Return to EITC Questions and Answers
Q7. How do I figure my credit?
A7. Once you know that you qualify for the EITC, you need to know how to figure the amount of the credit. You have two choices of how to figure the credit:
1. Have the IRS figure the credit for you. If you would like the IRS to do this, see Publication 596, or
2. Figure the credit yourself. To do this you must use the Earned Income Credit Worksheet (EIC Worksheet) in the instruction booklet for Form 1040, Form 1040A, or Form 1040EZ, and the Earned Income Credit (EIC) Table in the instruction booklet, or use the EITC Assistant Tool online.
For more information, see Chapter 4, Figuring and Claiming the EITC, in Publication 596.
Return to EITC Questions and Answers
Q8. How can I get EITC in my paycheck?
A8. You may prefer to get some of next year’s EITC throughout the year, rather than wait and get EITC after you file your tax return. To get EITC, complete Form W-5 and give the lower part of the form to your employer. Keep the top part for your records. For more information, see Advance EITC Questions and Answers.
Return to EITC Questions and Answers
Q9. What if I am prohibited from claiming the EITC for a period of years?
A9. If your EITC for any year after 1996 was denied and it was determined that your error was due to reckless or intentional disregard of the EITC rules, then you cannot claim the EITC for the next 2 years. If your error was due to fraud, then you cannot claim the EITC for the next 10 years. The date on which your EITC was denied and the date on which you file your tax return affects the years for which you are prohibited from claiming the EITC.
Return to EITC Questions and Answers
Q10. Where can I get more information?
A10. Find out if you are eligible for the Earned Income Tax Credit (EITC) by answering some questions and providing basic income information. Available in English and Spanish
* EITC Assistant
* Additional Publications and Tools
* EITC Thresholds, limitations and updates
Return to EITC Questions and Answers
Advance Earned Income Tax Credit Questions and Answers
http://en.wikipedia.org/wiki/Earned_Income_Tax_Credit
Earned income tax credit
From Wikipedia, the free encyclopedia
The United States federal Earned Income Tax Credit (EITC or EIC) is a refundable tax credit. For tax year 2007, a claimant with one qualifying child can receive a maximum credit of $2,853. For two or more qualifying children, the maximum credit is $4,716. Grandparents, aunts, uncles, and siblings can also claim a child as their qualifying child provided they shared residence with the child for more than six months of the tax year. However, in tiebreaker situations in which more than one filer claims the same child, priority will be given to the parent. A foster child also counts provided the child has been officially placed by an agency or court. There is a much more modest EIC for persons and couples without children that reaches a maximum of $428.[1]
A qualifying child can be up to and including age 18 at the end of the tax year, up to and including age 23 if classified as a full-time student for one long semester or equivalent, or any age if classified as 'totally disabled' for the tax year.[2]
Enacted in 1975, the initially modest EIC has been expanded by tax legislation on a number of occasions, including the more widely-publicized Reagan EIC expansion of 1986. The EIC was further expanded in 1990, 1993, and 2001 regardless of whether the act in general raised taxes (1990, 1993), lowered taxes (2001), or eliminated other deductions and credits (1986). Today, the EITC is one of the largest anti-poverty tools in the United States (despite the fact that most income measures, including the poverty rate, do not account for the credit), and enjoys broad bipartisan support.
Other countries with programs similar to the EITC include the United Kingdom (see: working tax credit), Canada (see: working income tax benefit), Ireland, New Zealand, Austria, Belgium, Denmark, Finland, France and the Netherlands. In some cases, these are small (the maximum EITC in Finland is 290 euros), but others are larger than the U.S. credit (the UK's working tax credit is worth up to £7782)[citation needed].
In the United States as of tax year 2006, some 20 states and the District of Columbia had their own EICs. These state plans generally mimic the federal structure on a smaller scale, with individuals receiving a state credit equal to a fixed percentage—generally between 15 and 30 percent—of what they are eligible to receive from the federal credit. A few small local EICs have been enacted in San Francisco, New York City, and Montgomery County, Maryland.
Earned income
Earned income is a technical term defined by the United States tax code. The following are the main sources:[2]
* Wages, salaries, tips, commissions, and other taxable employee pay,
* Net earnings from self-employment,
* Gross income received as a statutory employee, and
* a minority of disability payments.
Qualifying child(ren)
Age
If a person is disabled, he or she can be any age and still count as a qualifying "child." The IRS uses the phrase "permanently and totally disabled." However, they go on to define this such that the person was disabled at any time during the tax year such that he or she could not engage in substantial gainful activity and a physician determined that the condition has lasted or is expected to last a year or more.
If a person is enrolled as a full-time student during some part of five calendar months, he or she can be up to and including age 23. For example, the standard fall semester of a university in which classes start in late August and continue through September, October, November, and early December counts as part of five calendar months. A similar conclusion applies to the standard spring semester. However, the five months need not be consecutive and can be obtained by any combination of shorter periods. Full-time status is often defined as ten semester hours, although the IRS defers to how each specific educational institution defines full-time status. Schools also include technical and trade schools.
In all other cases, a person can be up to and including age 18 and can still count as a child for purposes of EIC.[2]
Relationship
You must be related to your qualifying child(ren) through blood, marriage, or officialdom. In addition, the child must be either in your same generation or a later generation. A foster child counts provided he or she has been officially placed by an agency, court, or Native American tribal government. An adopted child counts and can be in the process of being adopted provided he or she has been lawfully placed. And so, for the relatively complete list, your qualifying child can be your daughter, son, stepdaughter, stepson, grandchild, great-grandchild, sister, brother, stepsister, stepbrother, half sister, half brother, niece, nephew, great niece, great nephew, or any further descendant of these related persons.[2]
Shared residence
You must live with your qualifying child(ren) within the fifty states of the United States for more than half the tax year (six months and one day). Persons on active military duty are considered to be living within the United States. Temporary absences, for either you or the child, due to school, hospital stays, business trips, vacations, periods of military service, or jail or detention counts as time lived at home. "Temporary" is perhaps unavoidably vague and generally hinges or whether you or the child are expected to return, although the IRS is somewhat lenient and can count rather lengthy periods as temporary.[2]
Other requirements
Investment income cannot be greater than $2,900.
A claimant must be either a United States citizen or resident alien. In the case of married filing jointly where one spouse is and one isn't, the couple can elect to treat the nonresident spouse as resident and have their entire worldwide income subject to U.S. tax, and will then be eligible for EIC.
Filers both with and without qualifying children must have lived in the United States for more than half the tax year. Perhaps surprisingly, Puerto Rico, American Samoa, the Northern Mariana Islands, and other U.S. territories do not count in this regard. A person on extended military duty is considered to have met this requirement for that period of time.
For persons without a qualifying child, there is an age requirement in that the person must be from age 25 to 64.
Persons without a qualifying child must themselves not be claimable as a dependent; persons with qualifying children must merely not be claimable as a qualifying child. This is a subtle distinction that sometimes plays out.
All filers (and children being claimed) must have a valid social security number. This includes social security cards printed with "Valid for work only with INS authorization" and "Valid for work only with DHS authorization."[2]
For all filers, married filing separately acts as a disqualifying status and a person filing under that status will not be eligible for EIC. However, if the person has lived apart from their spouse for the last six months of the year, has jointly or individually paid more than half the cost of keeping up a main home (or several main homes) for six months for themselves and their qualifying child, and can claim that child as a dependent (or could claim, but are waiving the dependency to the other parent), the person can file as head of household and thus be eligible for EIC. Alternatively, if a person obtains a divorce by December 31, that will carry, since it is marital status on the last day of the year that controls for tax purposes. In addition, if a person is "legally separated" by December 31, that will also carry. [see 1040 Instructions]
EIC phases out by the greater of earned income or adjusted gross income.
EIC Table, 2007
The credit is characterized by a three-stage structure that consists of phase-in, plateau, and phase-out.
The same data, in words: for a person with two qualifying children, the credit is equal to 40% of the first $11,790 of earned income, thus reaching a plateau of $4,716 and staying there until earnings increase beyond $15,399, at which point the credit begins to phase out at 21%, reaching zero as earnings pass $37,782. The dollar amounts are indexed annually for inflation.
For married filing jointly, the plateaus travel $2,000 further.
This table, and the graph below, might make it appear as though EITC moves smoothly. In actuality, the amount of the credit is given by an IRS table that divides earned income into fifty-dollar increments from $1 to $39,783 (the three cases of no child, one child, and two or more children all end at somewhat awkward numbers).
EIC Graph, 2006
Impact
The EITC is the largest poverty reduction program in the United States. Almost 21 million American families received more than $36 billion in refunds through the EITC in 2004. These EITC dollars had a significant impact on the lives and communities of the nation’s lowest paid working people, lifting more than 5 million of these families above the federal poverty line. Template: Seccombe, 2007
Further, economists suggest that every increased dollar received by low and moderate-income families has a multiplier effect of between 1.5 to 2 times the original amount, in terms of its impact on the local economy and how much money is spent in and around the communities where these families live. Using the conservative estimate that for every $1 in EITC funds received, $1.50 ends up being spent locally, would mean that low income neighborhoods are effectively gaining as much as $18.4 billion. Template: Seccombe, 2007
Due to its structure, the EIC is effective at targeting assistance to low-income families. By contrast, only 30% of minimum wage workers live in families near or below the federal poverty line, as most are teenagers, young adults, students, or spouses supplementing their studies or family income.[3][4] Opponents of the minimum wage argue that it is a less efficient means to help the poor than adjusting the EITC.
Uncollected tax credits
Millions of American families who are eligible for the EITC do not receive it, leaving billions of additional tax credit dollars unclaimed. Research by the Government Accountability Office (GAO) and Internal Revenue Service indicates that between 15% and 25% of households who are entitled to the EITC do not claim their credit, or between 3.5 million and 7 million households.
The average EITC amount received per family in 2002 was $1,766. Using this figure and a 15% unclaimed rate would mean that low-wage workers and their families lost out on more than $6.5 billion, or more than $12 billion if the unclaimed rate is 25%.
Many nonprofit organizations around the United States, sometimes in partnership with government and with some public financing, have begun programs designed to increase EITC utilization by raising awareness of the credit and assisting with the filing of the relevant tax forms.
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